Facebook Inc.’s small print may be the next big thing in
European antitrust as watchdogs home in on how the world’s biggest social
network collects information from users that helps generate vast advertising
revenues.

Germany’s Federal Cartel Office is examining whether
Facebook essentially takes advantage of its popularity to bully users into
agreeing to terms and conditions they might not understand. The details that
users provide help generate the targeted ads that make the company so rich.

In the eyes of the Cartel Office, Facebook is “extorting”
information from its users, said Frederik Wiemer, a lawyer at Heuking Kuehn
Lueer Wojtek in Hamburg. "Whoever doesn’t agree to the data use, gets
locked out of the social network community,” he said. “The fear of social
isolation is exploited to get access to the complete surfing activities of
users."

The European Union’s antitrust arm has grabbed the
limelight with eye-popping penalties for U.S. technology firms it found fell
foul of anti-competitive behavior. Last year, it ordered Apple Inc. to pay 13
billion euros ($14.9 billion) in back taxes and last week it fined Google 2.4
billion euros for allegedly skewing search results in its favor. But lawyers
say the Cartel Office’s probe is testing the boundaries of antitrust law --
with ramifications far beyond Germany and Facebook as all kinds of powerful
technology firms seek to find new ways to cash in on their trove of customer
information.

It’s “more radical” than the EU’s Google case “because it
asserts that privacy concerns can be antitrust concerns” and that consumers
have a broader role than buyers of services in an economy, said Alec Burnside,
an attorney at Dechert in Brussels.

Two Billion

The German probe comes as Facebook, which now has 2
billion members and made more than $27 billion in revenue last year, confronts
heightened regulatory scrutiny in Europe. It’s being investigated by numerous
privacy authorities over its plans to merge data with the WhatsApp messenger
application, faces a court battle over data transfers across the Atlantic and
was fined in May for misleading the EU in a merger review of the WhatsApp deal.

Andreas Mundt, the Cartel Office’s president, said last
week he’s "eager to present first results" of the Facebook
investigation this year. Like the EU’s Google investigation, he said the
Facebook case tackles "central questions ensuring competition in the
digital world in the future."

Facebook declined to comment on the possible outcome. The
company has insisted it operates within applicable law and that it would
cooperate with regulators.

When the German antitrust regulator disclosed the review
in March last year, it said Facebook collects a large amount of personal user
data from various sources and creates user profiles, allowing its advertising
customers to better target their ads. Users must accept the terms while it’s
hard for them to understand to what extent they agree to surrender their
personal information, according to the Cartel Office.

Economic Power

Personal data is a hot topic in Europe where internet
companies have been criticized by privacy agencies for how they gather and use
people’s details. But in antitrust, it’s still a contentious issue that the
European Commission’s competition authority in Brussels has largely so far
side-stepped, saying its job is to focus on companies’ economic power.

That could be changing should the German regulator embolden
other authorities such as the EU to act. While the Google case focused on how
the company abused its power to thwart smaller rivals, last week’s decision
also revealed how the EU is starting to dig deeper into what technology
companies do with the personal information they gather from their users.

The commission pointed to how data collection creates and
cements the power of technology giants. Sites such as Google that attract huge
numbers of users also draw in advertisers who want to grab those eyeballs,
generating profits that can be used to pull in even more users, the EU
authority said. The data Google gathers also means it offers better results,
which makes it even harder for competitors.

Facebook is already the target of privacy watchdogs and
consumer groups in Germany. The Hamburg data regulator has been attacking the
network’s “real name” policy, which banned pseudonyms, and other aspects of its
user terms. Facebook won an interim ruling in litigation over users’ names but
failed to win a similar request over an order to stop processing data of German
WhatsApp users. Consumer group VZBV sued Facebook’s WhatsApp over clauses
allowing collection and transfer of user data between the platforms.

Some lawyers say the Facebook case is so daring in its
approach to antitrust that the Cartel Office should have left the question of
whether the company abuses users’ data to privacy regulators. Those watchdogs
-- once relatively toothless -- will be empowered next year when tougher EU
data privacy rules take effect, allowing them to levy fines of as much as 4
percent of global annual sales.

Dominant Power

“It may be difficult to show that Facebook is really
misusing its market position” under antitrust law, said Daniel Wiedmann, an
antitrust attorney at P+P Poellath + Partners, in Frankfurt. “It’s likely users
accept the terms not because Facebook is the dominant power on that market but
because they’re reflecting their preferences."

Facebook may have less to fear financially from a Cartel
Office probe as, unlike Google, it may not be fined. The current terms of the
investigation rule out a financial penalty. Instead, if it’s found to breach
antitrust rules Facebook would face an order to change how it operates.

"That’s the right choice,” said Wiemer. “In these
complicated questions where you enter new territory, it makes sense to first
ban a certain action without imposing fines."

Facebook’s vast wealth may show, like Google, that few
fines would be big enough to do it real harm. A warning to the most extensive
social network that requires it to change how it hooks in users and targets
advertising could make a bigger dent in the long run than any fine.

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